At the time Emefiele took over the leadership of the Central Bank of Nigeria [CBN], he had, tossed into his hands, a complex monetary policy dilemma that required high level of creativity to tackle. As the CBN governor, there were two major diametrically conflicting objectives he needed to resolve: the need to stimulate the economy through low interest rates and the urgent necessity to attract foreign portfolio investment through high interest rates.

This article was written by Ayo Arowolo and first published on ThisDay Newspaper. The views and opinions expressed here are those of the author and do not necessarily reflect the official policy or position of 360Nobs.com.

Choosing to go for the first would mean that companies and business owners would have access to relatively cheaper funds to carry out productive activities which ultimately would lead to more jobs. But the other end of the stick is that by voting for low interest rates, Emefiele would have shut the door against Foreign Portfolio Investment (they thrive on high interest rates for profit taking) which the country badly needed at that time.

The truth was that the economic reality on ground at the time Emefiele took over would make a focus on attracting foreign investment a compelling option. The oil price decline had begun to create internal and external imbalances that required short-term policy adjustments as well as long-term structural reforms to stimulate self reliant productive activities. That was expedient to give treatment to the economy that had been slowing down consistently since the third quarter of 2014 – from 6.23% in that quarter to 2.35% in the second quarter of 2015.

Economists and observers within and outside Nigeria were full of expectations that the new government’s promise of change centered on the policy issues of the moment in what was reckoned locally and internationally as Nigeria’s golden opportunity for socio-political and economic rising. The high hopes for the Buhari Administration gradually faded and despair began to inch in from the back door when the government failed to deregulate the petroleum sector after several years of subsidies, and left in suspense, macroeconomic, trade and industrial policies requiring decisive actions.

The resulting situation left Nigeria at the middle of the road; neither taking steps to mitigate the sustaining drop in crude oil earnings nor having adequate reserves to shield the economy from the external shocks. Amid the macroeconomic policy lull, crude oil prices made steep drops to hit the lowest mark in 11 years, And this scenario immediately became double jeopardy when the Niger Delta Avengers led the assaults on oil production, halving exports . And with the normalization of Monetary Policy in the United States, many oil-exporting countries suffered several economic setbacks. In Nigeria’s case, the spillovers were compounded by the significant and continuing decline in oil production, reflecting unsettled issues in the Niger Delta. With lower receipts, Nigeria’s economic slowdown culminated into a recession in 2016 with five consecutive contractions between 2016q1 and 2017q1. GDP growth decelerated from 6.2 percent in 2014 to -1.6 percent in 2016 and -0.5 percent in 2017q1;

• A spike in inflation rate which moved, after a three-year period of single digit rate, from of 9.6 percent in January 2016 to 18.7 percent in January 2017 and 17.2 percent in April 2017.

• Constrained fiscal space as expenditure grew amidst shrunken revenue. The ensuing fiscal deficit has led to rising debt profile, with the debt service to revenue ratio, at about 45.3 percent as against the 25 percent threshold

• A significant deprecation of the Naira from about N200/US$1 in June 2014 over N525/US$1 around February 2017. The Buhari Administration also refused to devalue to currency to attract what it called hot foreign money as it reckoned that with high food imports, devaluation as being suggested by experts, would hit the poorest the hardest in an already bad economic situation. Instead it sought to grow local (food) production. And looked to Emefiele’s Central Bank for solutions.

Much as going for attracting foreign portfolio investment through high interest rates was easy and desirable, doing that exclusively through devaluation would still hurt the economy which needed to be anchored on enduring local productive activities. Foreign portfolio investments are transient activities which can evaporate at a moment’s notice once there are appearances of hostile investment environment. The challenge then for Emefiele was to come up with a policymaking masterstroke that would address the desirable but conflicting objectives. What even compounded the matter for the governor was that his ability creates the masterstroke doesn’t reside exclusively within the realm of monetary policy. He needed the equally complimentary fiscal policy which is in another domain.

In fact one analyst observed that the situation Emefiele faced could be likened to a plane which must function with twin engines but one of the engines has packed up but the pilot is struggling to reach his destination with just one engine.

Well ahead of time in July 2015, the CBN’s monetary policy committee alerted the nation that the economy was heading into recession and called for complimentary monetary and fiscal actions. The long delay in approving the 2016 budget clearly ignored the warning and the fiscal authorities failed to provide the complimentary fiscal stimulus. This means that the action plan that was imperative to avert the recession failed mainly for lack of timely fiscal response.

Lamenting the situation, Emefiele said the prolonged budget impasse denied the economy of the timely intervention. Consequently, CBN’s effort to keep the economy afloat was insufficient to avert economic contraction. The conditions that led to the contraction in the first quarter remained largely unresolved by the end of the second, he said.

The Masterstrokes

In spite of the poor fiscal policy end of the equation, Emefiele has been able to introduce some master strokes that have brought stability to the economy especially by stemming the volatility in the naira exchange rates movement.

External Reserves: As of June 2015 when Emefiele assumed office, Nigeria’s Reserves had fallen from a peak of US$62 billion in 2008 to only US$37 billion (see the chart below). But following the sharp drop in crude oil prices, the Reserves fell to below $20 billion as CBN’s monthly foreign earnings, plummeted from as high as US$3.2 – 4 billion a month to current levels of as low as US$700 million monthly. To avoid further depletion in the reserves, the CBN took a number of countervailing actions including the prioritization of the most critical needs for foreign exchange. In this regard, and in order of priority, the CBN decided to provide the available but highly limited foreign exchange to meet the following needs to stop the depletion and re-build reserves:

Exchange Rate: Over the intervening period, it is delightful to note that these policies yielded some positive developments. In particular, the CBN managed to stabilize the exchange rate since February 2017 when it began to use the reserves it had re-built, thereby creating certainty for both household and business decisions. It has largely eliminated speculators and rent-seekers from the Foreign Exchange Market. The country’s reserves, despite having fallen, are still robust and are able to cover about 5 months of Nigeria’s imports as against the international benchmark of 3 months. And domestic production of items prohibited from the FX market is picking up nationwide, thereby creating more jobs for many more Nigerians.

Credit Allocation: As part of its long-term strategy for strengthening the Nigerian economy, the Bank established initiatives to resolve the underlying factors goading challenges to long-term GDP growth, economic productivity, unemployment and poverty that had pervaded the economy over the past decades. Hence, the CBN took measures to increase credit allocations to pivotal productive sectors of the economy. This is with a view to stimulating increased output in these sectors, creating jobs on a mass scale and significantly reducing import bills. So far, the bank’s targeted interventions have impacted on the following sectors:

The goals of increased employment and poverty reduction that he has given priority under his regime deserve all the attention. Taking new steps towards channeling credit to productive sectors of the economy represent effective strategies in attaining the defined goals.

That however isn’t the end of the road to his effort to prop up domestic production. He is making some headway through an effective engagement of CBN’s development banking capacity. In his inaugural speech, the governor promised to review the development finance programme of the bank, strengthen the participatory agencies responsible for the disbursement of funds, develop performance targets and improve monitoring operations.

So far, CBN has taken steps to match action with words in the governor’s development financing drive. Putting in place policies aimed at supporting the non-oil sectors of the economy represents a way forward for an economy that can be said to have come to the end of the oil-paved road. CBN’s development finance interventions across the country are valued at about N1.36 trillion, definitely large enough to make a big impact if well managed.

Emefiele is assuring of the bank’s determination to build capacity in the real sector big enough to stimulate the production-consumption-employment multiplier chain. That will be an effective route to boost foreign direct investments and rebuild external reserve through non-oil exports.

By repositioning the developmental financing programmes of the bank, Emefiele is taking CBN to its key role as a central monetary institution, which is to act as a financial catalyst through coordinated interventions in key sectors of the economy. In this process, agriculture is expected to assume its proper place in the economy in terms of food production and employment deliveries.

Entrepreneurship development has got a boost from the CBN through the launching of Youth Innovative Entrepreneurship Development Programme earlier this year. The pilot phase of the programme has set a target of empowering 10,000 youth in productive activities in four years. The scheme offers a credit line of up to N3 million to each participant and access to other CBN sponsored schemes that would be granted to those who successfully operate the scheme.

The sum of N40 billion has been set aside for farmers from the N220 billion micro, small and medium enterprises development fund. The fund, which is to be disbursed at an interest rate of 9% per annum, is targeted at creating economic linkages between over 600,000 smallholder farmers and reputable large-scale processors of agricultural products. This scheme could go a long way to enhance value added agricultural production, reduce seasonal scarcity of perishables and also improve capacity utilisation of integrated mills. And perhaps the most significant contribution of Emefiele’s CBN in the agriculture space is in local rice production where Nigeria is moving from being a massive importer of rice to self sufficiency in the near term within 2 years – ensuring massive savings in foreign reserves.

Also the CBN’s N300 billion Real Sector Support Fund (RSSF) is a timely intervention at a time that industrial activity is facing serious difficulties. It is obvious that certain lines of business have become unviable in the present dispensation and therefore new lines of operations will have to be explored. RSSF will expectedly empower people venturing to exploit new opportunities in many areas of Nigeria’s economic potentials.

The use of intervention fund
The use of intervention funds presents an alternative course of action in the face of inability to move generally in the direction of low interest rates. Emefiele did spell it out as his good intention to use low interest rates to spur domestic production. Even that statement of intention alone was sufficient to set the foreign exchange market astir. A low interest regime would mean farewell to high return seeking foreign portfolio investors that CBN needs desperately to keep the foreign exchange market stable in the short-term.

Without doubts with the Federal Government getting its acts together through the inauguration of its economic blueprint, Emefiele would be placed in a positive pedestal where he can implement his heart’s desire of stimulating production activities in the country. But on a final note, it has been so far so encouraging!

This article was written by Ayo Arowolo and first published on ThisDay Newspaper. The views and opinions expressed here are those of the author and do not necessarily reflect the official policy or position of 360Nobs.com.

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